The end of the car is coming

Opinion: Don’t fall for the hype about Detroit’s comeback or China’s insatiable demand

To hear some tell it, we are witnessing the rebirth of the automobile.

Tesla Motors
TSLA, +0.08%
has brought electric cars mainstream with its Model S sedan, auto sales are steadily on the rise and once-troubled U.S. automakers are soundly back in the black after painful restructurings.

But before you fall for the hype about Detroit’s comeback and China’s never-ending appetite for automobiles, it’s worth considering the other side of the argument before you throw any money at auto stocks.

Because while the most recent numbers show big strength for the industry worldwide, there are increasing signs that automakers may have their best days behind them.

U.S. rebound is over

To be fair, the auto business — particularly in Detroit — has come a long way from the pain of the Great Recession. And that’s certainly something to celebrate.

Furthermore, U.S. auto sales bottomed in 2009 at a mere 10.4 million vehicles sold that calendar year — the worst annual total since 1982. Now, new U.S. vehicle sales are predicted to top 16 million in 2014.

These are indeed noteworthy accomplishments, and part of the reason that Ford stock is up over 850% from its 2009 lows.

But looking ahead, things are going to get much harder for investors as year-over-year comparisons get less favorable.

Case in point: Ford and GM are expecting revenue to be basically flat in 2014, with low single-digit growth. And their counterparts in Japan, Honda
HMC, +0.27%
and Toyota
TM, +0.30%
are actually expecting single-digit declines in overall revenue.

That’s because a lot of the pent-up demand created by tighter spending has been used up.

Don’t take my word for it — listen to Jim Lentz, Toyota’s North American chief executive, who said as much in an Associated Press interview last year.

“The market then has to work off a much better economy, an improving economy,” Lentz said. “If we don’t have that, I think the market may flatten out.”

His timeline for that flattening in U.S. auto sales without a significant boost from broader economic and spending trends? “Sometime in late 2014.”

Younger Americans don’t desire cars

And bigger picture, let’s not discount the demographic and geographic shifts that threaten to reshape the auto market — among many other areas of Wall Street.

Mounds of data shows that in the wake of the Great Recession, Americans are moving back into cities in droves. One of the megatrands that comes from this re-urbanization is an increased reliance on public transportation and a shunning of cars.

In fact, last year billionaire real estate mogul Sam Zell said we may be seeing the “end of suburbia” as a result of this shift to cities — and if the suburbs die, so does the need for a preponderance of vehicles to commute in.

Younger Americans are clearly already moving away from autos. Consider that the University of Michigan Transportation Research Institute estimated that in 2010, 69.5% of 19-year-olds in the U.S. had a driver’s license compared with 87.3% in 1983. This is thanks to urbanization, as well as the psychosocial trend that has put the “freedom” offered by mobile devices and technology on equal footing with the “freedom” once offered by getting behind the wheel of mom’s station wagon on the weekend.

And those who do drive are sharing rides more and more through services like ZipCar, now a subsidiary of AvisBudget
CAR, +1.01%
after a 2013 buyout. Alix Partners recently estimated that for every car that’s part of a vehicle-sharing program, the auto industry misses out on 32 sales. And this trend isn’t going away.

Now, nobody expects America to give up on cars tomorrow. But given the short-term pressures of a post-recession rebound running out of gas and these very real long-term threats to vehicle ownership, it could be a very tough road ahead for the U.S. auto market.

China bottlenecks

Here’s where the bulls will pivot to the big potential of our friends in China.

But while it’s true that the 20 million vehicles sold in China last year dwarfs the total market in the U.S., it’s important to remember that the potential of this major market is not as limitless as some would say.

Pollution is a major concern, resulting in vehicle caps in many regions to keep emissions under wraps — something that puts an obvious limit on any growth that automakers may see here.

Consider that in Shanghai, new license plates are auctioned off for an average of $13,400 per tag each month. The tactic is meant to limit the number of vehicles on clogged Shanghai roadways. Other cities like Beijing, Guangzhou and Guiyang also have policies meant to limit vehicle ownership.

The plus side is that the bottleneck has created a rush to buy in some places while there’s still room, and has fueled the idea of high-priced cars as the ultimate status symbol. However, regulations are already creating a drag; Japanese investment bank Nomura estimates that growth in vehicle sales will slow to a 10% rate in 2014 thanks to government restrictions.

In fact, sales have already started to drop meaningfully. January vehicle sales in China were up just 7% from last year — still growth, yes, but down considerably from the brisk 14% annual rate across 2013.

Bulls frequently point to a dramatically low ownership rate in China as a sure thing that sales will skyrocket. According to the World Bank, vehicle ownership was around 6% as of 2010 while the U.S. boasted an ownership rate of nearly 80%. And while it’s true there will be growth in China’s ownership rate, the increase isn’t staggering. McKinsey & Company recently estimated that despite continued growth, penetration will remain low — with a prediction of just a 15% ownership rate by 2020.

And by the way, let’s not forget that a growing market doesn’t mean that all automakers benefit equally. For instance, China’s homegrown auto businesses including Geely continue to suffer market share declines — so much so that the China Association of Automobile Manufacturers recently lashed out at foreign competitors, claiming domestic brands will be “killed in the cradle” if the government allows U.S. and Japanese car companies free rein in the nation.

Auto stocks are slowing

Maybe Western companies will keep winning. Or more likely, maybe officials in Beijing will move to protect their own.

But either way, it’s important to remember that the need for growth is pressing for all automakers, but the growth itself isn’t big enough to support them all across the next several years as China’s recent growth rates fade and the auto market matures there.

And even for companies that grab market share in China, will it be enough to offset troubles in the U.S.?

To be clear, none of this is to say that cars are disappearing anytime soon or that the companies that make them are going away.

But before you hang too much hope on automakers based on brisk 2014 sales, remember the headwinds they face in 2015 and beyond.

Or heck, just look at share prices lately. Honda, Toyota, GM and Ford have all dramatically underperformed the market in the last six months.

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